May 10, 2018

Section 4191 of the Internal Revenue Code imposes a 2.3% excise tax on the sale of certain medical devices by the manufacturer or importer of the device. The excise tax was established by the Affordable Care Act to help pay for expanded enrollment in health insurance. The tax applies to sales of taxable medical devices after Dec. 31, 2012.

But payment of the tax has been suspended since its establishment. It was finally supposed to go into effect January 1 of this year.

Medical device manufacturers felt relief when the tax was again delayed in February, and with the suspension retroactive to the beginning of the year. The tax is now set to go into effect on Jan. 1, 2020. Some are hoping for a permanent repeal before the end of the current moratorium. Estimates range as high as $3.7 billion in describing the taxes saved by device companies over this latest two-year suspension.

The tax was strongly opposed by the $150 billion a year industry that produces everything from catheters to pacemakers and artificial joints. In Congress, it was unpopular not only with Republicans but many Democrats from states like Massachusetts and Minnesota with large numbers of medical device companies, according to a January 2 article in USA Today.

The term “excise tax” is somewhat redundant, as an “excise” is defined as a tax levied on certain goods and commodities produced or sold within a country and on licenses granted for certain activities. They can be levied at the federal, state, and local level.

Today, an excise tax is levied on a particular product or service, usually calculated as a specific fee per unit of the product or service, but sometimes as a percentage of value.

One important example is the fuel tax imposed at federal and state levels to fund the construction and repair of transportation infrastructure. Similarly, excise taxes on alcohol and tobacco fund health education projects and other programs. Other examples include a 75-cent-per-dose tax on mandatory vaccinations and a 10 percent tax on tanning sessions. Municipalities in many states also impose excises, on items and services like firearms, ammunition, sport-fishing equipment, wagering, and telephone calls.

The slashing of the overall corporate tax from 35% to 21% may soften the blow for some manufacturers, industry officials said. But the excise tax is applied to sales and not income, so its effect will likely be felt more by smaller firms, and startups with promising new products that haven’t yet made money for their developers.

As with all such important issues before Congress, continued discussion that includes all stakeholders should yield workable solutions.